Very important, but still just No. 2, Russian telecom VimpelCom (NYSE:VIP) reports Q1 2006 earnings results tomorrow. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.
What analysts say:
- Buy, sell, or waffle? Fourteen analysts call VimpelCom, but only two of them put the stock on hold. The other dozen all say buy.
- Revenues. No wonder -- analysts believe the company grew its revenues an astounding 46% last quarter, setting it a target of $936.2 million in sales.
- Earnings. On the other hand, they also think that profits slid 15%, and they'll be looking for just $0.63 per share tomorrow.
What management says:
CEO Alexander Izosimov laid out VimpelCom's strategy for the future in the firm's recent presentation of Q4 and full-year 2005 results. The upshot of the presentation is that VimpelCom has just about reached the end of its organic-growth-through-acquiring new customers phase. Simply put, there just aren't that many potential customers left to be acquired (at least if you believe Bloomberg's statistics, which suggest that 94 out of every 100 Russians already owns and uses a mobile phone.)
The new strategy, supported by VimpelCom's recently announced partnership with Google (NASDAQ:GOOG) to make cell phone Internet use more attractive, is to "extract [more] value from existing operations." The firm will aim to do this by (1) increasing customer loyalty, and (2) increasing "revenue market share." Achieving the former would make VimpelCom more profitable by lowering the cost of reacquiring customers lost to churn. Achieving the latter will depend on capturing more of the corporate customer market and encouraging existing customers, both corporate and retail, to use their phones to purchase higher-value-added products. (This is where Google could help, by making Internet searches via WAP-enabled phones easier and, therefore, more useful).
What management does:
46% revenue growth in a country where essentially everyone is said to already own a phone suggests that VimpelCom is achieving its "revenue market share" goals. And the chart below suggests that the firm is doing a good job of transforming that greater revenue into greater profits.
|
Margins % |
9/04 |
12/04 |
3/05 |
6/05 |
9/05 |
12/05 |
|---|---|---|---|---|---|---|
|
Gross |
82 |
81.8 |
81.9 |
81.9 |
82 |
83.1 |
|
Op. |
34 |
31.7 |
30.9 |
30.9 |
30.8 |
30.5 |
|
Net |
17.6 |
16.3 |
16.2 |
17 |
18.5 |
19.2 |
One Fool says:
From a GAAP numbers-perspective, VimpelCom faces two primary issues. First, for the first time, its selling, general, and administrative expenses (SG&A) grew faster than did its revenues last quarter. Second, depreciation and amortization costs are also beginning to bite. These costs, too, rose faster than did revenue last quarter, and in contrast to SG&A, these have been outpacing sales growth for a while. As a result, even though VimpelCom's rolling gross margins continue to inch upwards, its operating margins have been sliding for the past 18 months.
Finally, as for what will keep these margins moving higher, I think we need to watch two things. First, the SG&A line. There's little VimpelCom can do to reduce its depreciation costs -- those expenses have already been incurred; it's just a matter of writing them off now. But the company can control SG&A. Second, VimpelCom reports its "customer churn" periodically. We want to see churn decreasing -- because if it doesn't, those SG&A costs are going to keep rising as "churned customers" have to be wooed back. And that won't be good for margins at all.
Competitors:
- Golden Telecom (NASDAQ:GLDN)
- Mobile TeleSystems (NYSE:MBT)
Suppliers:
- ECtel (NASDAQ:ECTX)
- Comverse (NASDAQ:CMVT)
Fool contributor Rich Smith does not own shares of any company named above.
